Turning uncertainties... into opportunities

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Turning uncertainties... into opportunities

Policy continuity is expected as President Putin is widely expected to win a second term

Event

Russian presidential elections – opposing eight candidates – are scheduled on 18 March 2018. Vladimir Putin is widely expected to win the next contest and to be re-elected.

Impact on country risk

Following the elections, domestic policy continuity is expected. Indeed, in his recent state of the nation address, President Putin promised to improve living standards, modernise the economy based on ‘big data’, develop critical infrastructures and address the demographic decline. Yet he did not announce any major reforms. Beside domestic policies, Mr Putin also unveiled an ambitious weapon programme. It is unclear whether this message was destined for the domestic audience or whether it was an invitation to the West to negotiate or a warning that Russia will develop new weapons which might represent a dangerous escalation. However, this highlights that tensions with the West remain high. In this context, the threat of strengthened existing sanctions persists.

In 2014, the Russian economy was hit hard by the sharp drop in oil prices and the imposition of international sanctions. As a result, the exchange rate of the rouble depreciated sharply and the economy fell into a recession. Following two years of negative growth, real GDP growth rebounded last year and is likely to grow by (a mere) 1.7% this year. The current account balance is expected to remain in surplus. It should be noted that whereas the current account balance of most of the oil exporters turned into a deficit following the sharp drop in oil prices in 2014, Russia’s current account balance remained in surplus in the 2014-2016 period.

The macroeconomic policies are solid. After all, in spite of the double external shock that hit the Russian economy hard in 2014, general government finances remain sound. General government debt represented less than 20% of GDP in 2017 and the fiscal deficit is limited (less than 3% of GDP). Moreover, the monetary policy has been impressive in recent years. As a result, foreign exchange reserves are high – covering 10 months of imports and more than 6 times the low short-term external debt –, the rouble is relatively stable and inflation is very low at 2.2% in February 2018, i.e. below the central bank’s target of 4%.

Low inflation has allowed the central bank to gradually decrease its benchmark interest rate to 7.5%. Even if inflation is likely to slightly increase, it should remain relatively low. Hence, the central bank is likely to further ease its monetary policy. As shown in graph 3, the lending rate closely follows the evolution of the Central Bank Policy Rate. Hence, it is also expected to decrease which would have a positive impact on the systemic commercial risk. The lending activity is also expected to continue to increase as the banking system appears stable, notwithstanding the recent rescue of three large private banks and endemic weaknesses in many small banks.

Credendo’s political risk classifications remain stable. The short-term political risk rating – representing the liquidity of a country – is in category 3. Given the sound liquidity, this risk is mainly driven by geopolitical tensions and related sanctions.

The MLT political risk – which represents a country’s solvency – is in category 4. It is also dominated by geopolitical tensions and related sanctions. The moderate category 4 takes into account the relatively low financial risk, the large reliance on oil and gas as a source of current account receipts and public revenue and subdued MLT growth prospects which are hindered by negative population dynamics, low productivity, lack of structural reform and a deterrent investment climate.

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